The following is information about a banking system: new currency deposited in the system = $40 billion;desired reserve ratio = 20%;excess reserves prior to the new currency deposit = $0.
-Refer to the above information.The banking system will be able to expand the money supply through loans by:

Question

Quizplus · Accepted Answer

The money multiplier is 1/desired reserve ratio = 1/0.20 = 5. The potential increase in the money supply is the new deposit ($40 billion) multiplied by the money multiplier (5), which equals $200 billion. However, since $40 billion is already deposited, the expansion through loans is $200 billion - $40 billion = $160 billion.

The Following Is Information About a Banking System: New Currency